 First off, if I can ask everybody just to make sure that all their electronic devices are on silent mode. Agenda item 1 is a decision on taking business in private. Agenda item 4 is consideration of the evidence heard. Are members agreed to take that in private? Agenda item 2 is evidence on Audit Scotland's spring budget revision for 2017. Members have a copy of the proposed spring budget revision in their meeting papers. I would like to welcome to the meeting Ian Leitch, chair of the board of Audit Scotland. Ian is accompanied by Caroline Gardner, of course, the Auditor General for Scotland. Diane McGiffin, chief operating officer and Russell Frith, assistant auditor general. I understand that this is a big day for Russell because this is the last time we are going to see him in front of us. He is retiring. I would like to take the opportunity to thank you for all the support and everything that you have given the commission over the years to wish you well in the retirement to come. Thank you very much. It has been mainly a pleasure attending. I think that I have only missed one or possibly two of the SCPA meetings since it actually started. I will miss it. This is his last official engagement. After this meeting is concluded, he does not go back to the office as he is going home, he is retired. This is his last outing. I thought that just the record and the board of Audit Scotland are extremely grateful to him for his assistance. On the other hand, a plea in mitigation in advance. Since he is demob happy, we need to be careful what he says. We have no time constraints on today's meeting, so we will make it worthwhile to be here. I will start by asking the other general to make a short introductory statement, perhaps a few minutes. I will focus on the spring budget revision initially and we can move on to the next agenda item when you are ready. As you know, our spring budget proposal requests £2.826 million to meet a non-cash pension accounting charge that will arise as a result of accounting adjustments in 2017-18. The request relates solely to pension adjustments. We are not able to plan for these due to the timing of the information that we receive from our actuaries and the Scottish Government has asked us to deal with them through the spring budget revision process. It is worth emphasising that those accounting adjustments are notional and do not generate cash movements. As you know, the area tends to be complicated, but we will do our best to answer questions that you and the commission may have and we will leave it there at this point. Perhaps I can begin by having a look at the individual amount that you have here. Can you confirm that you have had preliminary discussions with the Scottish Government to confirm that the previously agreed arrangements with HM Treasury remain in place and have you advised them of the amount of audit Scotland's requirement? I will throw it open to members if they have any comments. Anything that they would like to ask on this particular issue? No? In that case, can I ask members if they are content to agree the spring budget revision 2017-18? I agree. We will write to the Finance and Constitution Committee to inform them of our decision. I would like to move on to agenda item 3, which is the budget proposal for 2018-19. I am taking evidence on the budget proposal of Audit Scotland. Members have a copy of the budget proposal in their meeting papers. We have the same witnesses for this agenda item. Therefore, I would like to invite the chair of the board, Ian Leitch, to make a short introductory statement, perhaps five minutes, followed by the Auditor General. The chair will be less than that, because you have our budget proposals before you. As you are aware, convener, as indeed your members are, this is a time of real change for Scotland's public finances as further powers are devolved to the Scottish Parliament. Our priority in Audit Scotland is to ensure that the high quality audit work carried out continues across the piece and that the organisation is sufficiently resourced to take on these challenges. The budget proposal supports the goal by identifying resources to carry out new work, as detailed in our submission, as well as providing support to Parliament in its scrutiny of what will become an increasingly complex financial picture. While some aspects of these changes are still unknown, for example the impact of Brexit, there are other areas where we know our work will increase, such as the creation of new bodies in the transfer of powers. Our estimate of resources in those areas is based on our experience. Work continues on the implications of the UK leaving European Union, but at this stage the impact on audit work cannot be quantified and our budget proposal makes no specific allowance for the changes that may occur. This is an area that we are keeping under review and we hope to be able to respond flexibly where necessary. In terms of audit fees, our budget proposal for 18-19 will continue to deliver real reductions in fees while maintaining the quality of our work. If I may chair, I will hand over to Caroline Gardner in her capacity as a accountable officer to give her opening view on the budget proposal. Our budget proposal reflects significant change in financial powers and workload for the Parliament. The overall revenue resource requirement from the Scottish Consolidated Fund for 2018-19 is £7.148 million, which represents an increase of £617,000 from 2017-18, the current financial year. The main factors in this are work that is associated with the new financial powers coming to the Scottish Parliament and the Biennial National Fraud Initiative, which, as you know, produces a peak every other year. We anticipate that additional capacity will need to be faced in over the next four years for the new financial powers as they come on stream. Overall, the additional resources will enable us to carry out new work, which includes assurance to the Parliament as the financial and social security powers in the Scotland Act 2016 are implemented. Further work is supporting Parliament as a complexity of the Scottish finances and the links to economic performance increase. The Audit of the Scottish Fiscal Commission, where legislation does not allow us to charge a fee for the audit, works with the National Audit Office to provide assurance on income tax and, in due course, VAT income, and the order of further taxes and social security as those are devolved. As ever, we are happy to answer your questions. I suppose that the most significant aspect of this is the additional post. That is where the money is. Your 9.4 per cent increase in cash terms is very substantial, given the austerity that we are in at the moment. Assuming that not all the new posts will be filled in 1 April 2018, can you confirm that the total additional funding takes into account assumptions on phased start dates for the new staff? Yes, chair, certainly. It's worth unpicking a bit the people and the movements behind the numbers. We estimate that in 2018-19 the total cost of doing the work will be about £667,000. That does incorporate an element of phasing over the year. We have actually started to work up towards the full capacity that we want in 2018-19 already by using efficiencies within our existing budget for this year. For example, we have recruited a small number of additional professional trainees during the appointment round that we have just been through. As you will see from the four-year projections at the back of the proposal, we expect that to build up across the piece. We have factored in the fact that we won't have everybody in place and fully operational on 1 April. In fact, we are bringing some of the costs forward into 2017-18 to use the flexibility that we are building into our budget during the year. What are you estimating that the full-year costs of those additional posts will be? Diane, can I ask you to take the commission through the detail of that? The full-year costs are presented as a net additional cost in the proposal because we have looked closely at our model of resourcing and the portfolio of work that we have with the Scottish Government and Central Government sector and generated efficiencies in how we work in pulling together our teams who will be working there. The additional funding requirement is around £380,000 and the full cost of the work is around £660,000. However, we have introduced efficiencies in how we have planned to adjust the focus of the teams to take some of their current work and apply some of the work that will be necessary for new financial powers. £67,000 is the annual cost of the eight posts. It would be the annual cost, but we have reduced that by delivering efficiencies. The amount for the new post is reduced to £380,000. In your budget documents, you are saying that the full additional resource required by 2021-22 is 20 staff at a cost of £1.2 million. If I could explain the rationale behind that. The planning that we have done for new financial powers has been based on modelling, which looks at a low point, a high point and a mid point. For now, the most prudent assessment that we can make is based on the mid range of those assumptions. This year, the budget that you are considering today is the largest single growth, an estimate of about eight full time equivalent posts. In each of the subsequent three years, we will be looking at an additional four posts if our mid range assumptions hold true. We will be revisiting those assumptions continually throughout the years, particularly as the exact timetable for rolling out new financial powers transpires. We will be revisiting annually with you how those assumptions are holding up or not. We have explicitly and in discussion with the board pitched our bid at the mid range assumption, because at the moment, although we can be very certain about a lot of the work, there are still some uncertainties and a need for flexibility. We anticipate that the need for flexibility will continue for a few years to come. Alongside all that work, as the chair mentioned, we are also having to think through what the implications of Brexit will mean for us downstream. That is one of the reasons why we intend to actively monitor the resource requirements that we have and to be in active dialogue with you as a commission as those transpire. You have indicated in the past that there were recruitment issues. Have you taken those into account? Are you fully confident that you will be able to recruit at the salaries that you are talking about, the correct spread of skills and so on? We are confident at the moment that we have good data on our recruitment for this year. Recently, you will know from our annual reporting accounts, we have revised our roles, pay structure, grading structure and created an attractive proposition for people joining the organisation that focuses on the opportunities for career development. At the moment, that is working well for us in the market and it is also something that we will keep under review. We are conscious of some hotspots for skills and we need to be able to respond to that. That is something that we have an active discussion with the Immuneration Committee generally around data and IT skills. As we move into more data analytics and use of econometrics and so on, we will be in competition with other employers there. Our focus as an employer has been on providing a good career opportunity in the round. When you are talking about data there, are you meaning techies, people with skills specifically in relation to IT? Both IT skills and also in the use of data and presentation of data and in analysing data. One of the areas of development for us has been in our audit intelligence work where we are looking at providing our auditors with really good analysis using up-to-date data across a portfolio of work to free them up to focus on adding value through the work. We also support our performance audit work through the data analytics project. There is a mix of both sets of skills. We are talking about 2018-19. You are saying that by 2021-22 the staff costs will have risen to £1.2 million over where we are now. What is that missing year? What is the progression through that? We are only talking in three years' time. We are talking about eight-pulse in this year at a mid-range estimate. Eight-pulse in this year is the largest step change and four-pulse in each of the subsequent years if the assumptions that we are working with hold true. Are you satisfied that at this level of resourcing there is huge pressures happening everywhere within the audit sphere with additional powers coming down and so on? Have you covered also the needs of the Accounts Commission in terms of anything additional that they may have to tackle as a result? I do not know if there is. I am just saying, has it been considered? One of the strengths of the model and public audit that we have is that Audit Scotland is the single agency providing resources to the Auditor General and the Accounts Commission. We are able to plan the deployment of our skilled people across different portfolios of work. The budget that we have before you takes into account the new financial powers work and also the ongoing delivery of the recently revised best value approach in local government, as well as the core financial work and the programme of performance audit work. We have a model in deploying colleagues on work to extend their experience and skills and to give them a range of opportunities so that we build strength in the skills and experience that people have. The plans that you have before you are based on delivering all of the work that is outlined in the budget proposal. You have emphasised the fact that the figures that you are giving are sort of mid-range. What is the top end of the range here? The top end of the range would be going up to possibly in future years, rather than four full-time equivalents, possibly as much as double that. At the moment, we would rather base our plans on the mid-range, which we have built up taking into account all our accumulated knowledge of the resources that are required to go into auditing those types of things and also the development capacity that we need to respond to the fast-changing policy environment. On your budget proposal, Audit Scotland has assumed a 1 per cent increase in its pay scales from next April and a corresponding uplift of 1 per cent in the fees that it pays to the audit firms at your point to work on your behalf. The Scottish Government in its draft budget, if you will be aware, state that it guarantees a minimum 3 per cent pay increase to public sector workers earning £30,000 or less and an increase of 2 per cent for those earning more than £30,000. If pay awards in the public sector in Scotland generally exceed 1 per cent, does Audit Scotland plan to revisit budget proposals? It's worth emphasising for the committee that our budget proposal was submitted before the budget last week and before the pay policy was published. We've prepared it on the assumption, as we say in the paper, of a 1 per cent uplift in pay scales and a 1 per cent inflation cost. We've started modelling what the pay policy that was published last week will mean for us and I think we're waiting for some more detail on how it applies specifically, but it will depend on the make-up of individual workforces and I think Diane would like to add a little bit of detail to that for you. We're due to go into negotiation with our trade union in the new year and both they and we will be looking closely at the technical guidance, which will come out from the Scottish Government in January. We'll be looking closely as we go into the negotiations at how we can respond to what from the PCS point of view our recognised trade union and for our wider group of colleagues is a welcome movement on pay policy, but also recognising that we have to do the right thing by our colleagues, our stakeholders and our clients. We'll be going into the negotiations with the trade unions on the basis of this budget and looking at the longer term fees and funding options available to us and efficiency options to respond to the opportunities presented by what will come in the detailed technical guidance. We're going into the negotiations in the new year with all of that as the backdrop. Is the planned 1 per cent or whatever increase it is in fees to appointed audited firms? Is that a contractual requirement? Yes, it is. When we put out the tender documents we were clear that the prices the firms were bidding were on the basis that they would receive increases during the course of the five-year contract equal to the base pay increase for Audit Scotland staff. In this case, the assumption here is 1 per cent and 1 per cent for the firms is equivalent to just under £40,000 a year. Can I ask about the cost implications of a higher pay award and a higher increase in fees paid to appointed auditors, assuming that these are linked? An additional 1 per cent over and above what we've assumed in the budget is £41,000. For our staff, we estimate at the moment that a further 1 per cent would be the equivalent of about £150,000. It would have a significant impact in the overall budget envelope that we've got, but as Diane said, we would look to negotiate with our partners in PCS a package as we have done in the past that balances the interest of staff with the value for money that we're able to offer to the public purse. Can I ask if you're aware of the salary ratio between the highest and lowest paid staff members within Audit Scotland? Russell, we'll check the exact figure. I think it's about four and a half times. Do you monitor that closely and take any steps to close that gap? Diane, we've got annual reporting accounts and we consistently, over the past few years, have geared our pay settlements to increase the lower paid salaries that we have and particularly for us, increased the graduate trainee pay scales that we have. We are an accredited living wage employer and we have also extended that to contracts that we have for some of the services that we buy and we have consistently, with our PCS partners, looked at opportunities to gear our pay and reward system to improve the pay for lower paid staff. The disclosure in our accounts to March 17 was that the multiple between the median salary, which is the one that's required to be disclosed, and the highest one was 3.4 times. Bill, you wanted to come in on the back of that. Just a couple of things, just to go back to what we were speaking about before. How much overtime do your staff work? Two parts to that question. People work the hours required to do the job but in general we don't pay for overtime except in specific circumstances that Diane can talk you through. Generally the only specific circumstances that we pay for overtime are with our IT colleagues who work out of hours to maintain our services or to apply new systems and so on. So have you built that overtime however it is, not the IT one, into your requirement for more staff? We've not built an overtime requirement but the requirements for new staff are built on our knowledge of what our model of resourcing teams delivers, the amount of hours that they are available for, the training and development requirements that they have across the different levels and skill mix that we have. So there's a very detailed picture that leads up to the budget proposal that we delivered to you. What is your gender pay gap? We don't report a gender pay gap significantly and I can come back to you on that. We analyse a whole range of statistics on gender equality, on pay, on access to learning and development, on part-time contracts and so on. We have reviewed our pay system and implemented a new pay system. It was the subject of an equality impact assessment and proven to be sound. There are no differences in our gender pay that aren't explained by virtue of issues other than gender. So you will be able to produce the gender pay gap? We have produced an annual equality report which is available and I can forward that on to the commission if you would like. We produce that annually. Does that have the gender pay gap in it? It reports on pay. Is that up? Yes, it's got the gender pay gap. We have a robust pay system which has been the subject of an equality impact assessment and shows that there aren't differences that are arising in the outcomes because of gender. Any differences there are which we examine annually and report to the remuneration committee on are the result of factors other than gender. We are in a good place. We will look forward to seeing the report. I will go back to recruitment just briefly. You talked about attracting people with the technical skills to update your data and analytics. Can you give me an idea of, A, if you think that you can attract those people and B, how long will it take for them to update the data and analytics in a broad sense? We already have colleagues on board who have been working on our data analytics project for a while. We have also been extending the network of colleagues inside the organisation who have an interest or aptitude for data analytics and investing in learning and development for them so that we are trying to strengthen our resilience in this area and our ability to deploy data analytics tools in audit work. We are currently recruiting for an IT member of the team. I don't have the results in for that yet but we can report back on that. The IT market is very fast moving so sometimes the data that we have from the last time that we are in the market isn't entirely a predictor of what will happen next time we are in the market. We have had good success in bringing in some secondments with relevant experience who have helped to develop the skills of the team. We will be using our extensive network of, with further and higher education, other bodies and so on to advertise recruitment and we will be specifically targeting our recruitment campaigns in the right areas. We are fortunate in that Audit Scotland, as an employer brand, is strong for people who want to work in finance in the public sector and we have to work hard to maintain a really good offering for colleagues in the round. One of the things that is greatly valued, we know by our existing colleagues, is work-life balance and flexibility and we have to make sure that what we are offering in employment terms is valuable in the round to people and that we offer a range of options and opportunities. We are particularly focused on career development and giving people the option to come and work with us and develop their skills and experience. This year, as well as recruiting an enhanced number of graduate trainees, we have taken on our first school leaver to offer entry into the accountancy profession from a school leaver point of view and over the years we hope to develop that as an additional albeit small route for people into the accounting profession. Can I just change tack a wee bit and ask you about your capacity to deal with the sort of changing nature of work and your obvious increased workload and I'm thinking particularly the great uncertainty of Brexit and the new financial powers. Can I ask about your capacity if you feel confident that you are actually, you do have the plans and that you will have the staff in place to deal with all that? I think that that's been set out here, the additional powers, although there's some uncertainty and we've built it. The Brexit one is more troublesome, frankly, because we don't know what we don't know but we've still got, and I've used the word before when addressing this commission, it's all about preparedness. We are trying to work and we have a team working on this on certain assumptions about Brexit. What will it mean? Where will the cost lie? What will the cost be? What will Westminster devolve further to the Scottish Parliament? What will come directly to the Scottish Parliament when we Brexit? There's a degree of uncertainty, a considerable degree of uncertainty. That's the area that is soft. On the first part of your question I think we've set out and Diane has answered what we think we need next year and where we're going with the financial powers. We don't want to make any figures, and that's why I said in my opening remarks that we haven't made any provision in that sense for what Brexit will be because we're still working on this preparedness. Not just our own preparedness, we've got to anticipate to some degree the extent of the bodies we audit, their preparedness and how they're geared up for it, and it's extremely difficult. However, this is one of our priorities and one of the things that we're going to almost think tank in the office working on. It's a subject at every board meeting that is addressed. I cannot say that we've got a definitive answer. If we had, I think that I'd go out and buy some Britcoins 10 years ago, but not today. They're too pricey, but that's the thing that we're working on, and it's really, really difficult. Have you got a worse-case scenario in terms of if that happens and if that happens, and it might sound extreme, can we cope with it? On financial powers we've dealt with that. On Brexit... I'm thinking about Brexit actually. Brexit. Specifically, we don't have a worse-case scenario because we don't know what we don't know. If we were to simply pluck a worse-case scenario out of the air, it would mean cost. How do you put a figure on that? I think we have to take this bit by bit. The commission has questioners on this in the past, and rightly so it's a question we ask ourselves constantly. We have made provision in our budget for looking at and seeing where Brexit is going. But, frankly, until the powers that be with respect—and there's not a political point—know where they're going, we cannot be assumed to know where they're going. So it could come as a bit of a disaster scenario, in which case of a big hike in budgets. We think that's unlikely. The way things are going, there is talk of a transition period, which allows for some degree of planning for the audit implications, which is our interest in this matter. Not just from our preparedness, but from the other side, the Government's preparedness to deal with the financial aspects of what they'll be getting and our ability to audit it. So we're conscious of the big issues, but we're not conscious of the specific answers. We're trying to take the same approach, as the chair has said, to the approach that we've taken to new financial power since 2012, when the First Scotland Act was passed, which is to invest our time in making sure that we understand as the picture becomes clearer what it means for the Scottish Government and for public bodies and therefore what it means for us. So we're staying close to Government to understand the sorts of planning they're able to do at this stage, the areas that they've identified as being particularly at risk if there is a crash out of the European Union in 2019, the sorts of preparations they need to make, not so that we can audit that at the moment because that wouldn't be realistic or fair, but so that if it happens we can respond to it. And we can look at the Scottish Government as a whole in the round. The other choice is that it's having to make about priorities and where it invests skills and time. We'll continue to do that until we've got more clarity on what it means as we've done with new financial powers. Thank you, that's helpful, thank you. Bill? Just before I move on to the subject, there's interesting scenarios in order to embody a worst case for others might be a best case for you because you'll get more work and more excitement for the staff and for recruiting. To be honest, at the moment it feels as though we have plenty of interesting work on the stocks. We've given you a flavour, I hope, in the budget proposal that we're well placed for the new financial powers that are being implemented, but there's no doubt they are a challenge for us, they're a stretch for staff, they're requiring everybody to be working at the top of their game. And it's probably worth being clear that we don't have any financial incentive in increasing our workload. We can't make a profit, we break even year on year and we recover our costs from Parliament and from the bodies who fund us. So we're grateful for the challenging work, but I don't think we're looking out for more at the moment. Moving on to the issue of quality where you've asked for an increase, I think you had £100,000 last year and now another £150,000 to take it up to £250,000. What does that actually mean? How do you spend that money? Where does it go? Members of the commission will remember that our budget proposal last year made mention of the fact that the procurement round that we had been through with the firms who we've now appointed for an additional five-year period had generated some significant savings for us on top of the savings that we've made, the efficiencies that we've made in ways of work across Audit Scotland. Now, that's a good thing for the public purse, but we were very conscious that it also raises the risks of Audit not being delivered to the quality that's required across the piece, and we recognise the commercial pressures that the firms particularly are operating under. Over the last couple of years, we've done a couple of things to mitigate that risk. The first is to agree a new audit quality framework, which governs the quality assurance across all of the audit work that's carried out for me and for the Accounts Commission. The second is to put in place independent assurance of all of the audit work that's carried out, financial statements work done by the in-house team that we've had in place in the past, but for the first time, direct assurance on the quality of the audit work done by firms and independent assurance rather than peer review assurance of performance order and best value audit work. The third strand is an enhanced reporting regime that the commission will see at the end of this financial year in its first developmental stage that provides a marshalling of all of the evidence that we've got about audit quality and compliance with the standards and the terms of the contract in one place. We're funding that internally through savings made from the procurement round and from restructuring of the business, but we are investing in that because it's hugely important to me and to the commission, and I know it's been a matter of concern to the commission here as well, the SCPA. What does the 250 actually go on? We had just let a contract in the last two or three weeks after a competitive process with ICAS to review every year a sample of audits carried out on my behalf and the Accounts Commission's behalf. That's a significant element of it. I would need to check what the result is. It will be around £60,000 per year. Up to £250,000 if we can go through the main items. The contract is the new element and we are then restructuring our business to put in place a team that is there specifically for audit appointments and assurance at arm's length from people delivering audit work in Audit Scotland and elsewhere and responsible for doing the in-house elements of the assurance work that's required. The relationships with all of the appointed auditors and the annual reporting that's required across the piece. That's still unfolding. We're due to review it during 2018. That's what we've been ring fencing to invest so far given the importance of audit quality and we'll revise that as it moves forward. I've still got 60 out of 250. Is the rest of it internal staff costs? The rest of it is staffing costs and a small consultancy budget to help us to develop some of the parts of the framework that we still need to develop mechanisms and methodologies around, for example, on taking feedback from clients and stakeholders about their perceptions of the quality of audit, which you'll know is a very complex area. There's a core team. There's independent external assessment of the quality of audit through ICAS and there's a consultancy budget for the further development work that's required. Is that consultancy? I think that the consultancy is around £40,000. How many are in your team? There are a team of at the moment three and we'll be bringing an additional full-time equivalent role or roles into the mix. Sounds quite an expensive three people then to get your 250. These are the total costs including on costs for the staff involved. So it's £150,000 for three people? Approximately. The 50,000 is around the average full cost of employing a member of staff and the staff who are involved in audit quality appraisal tend to be at the more senior end of the scales because they need to have experience in order to do the job. So are those three people now designated and post? They know who they are? I commend you for the efficiency savings that you've already made and indeed the ones that I see in your budget proposals. I appreciate times are tough so being able to do that is much appreciated by the commission. You've explained the additional £150,000 so I'm not going to go there again but the only other increase in fees was under legal and other professional fees. I think an increase of 10% isn't huge but I wonder whether you could give your observations on why that is. Diane, do you want to put that up? I think that this is based on our understanding of our anticipation of demands for additional advice in the current climate of a lot of uncertainty and fast moving policy changes and developments and so on. Included in that heading are our general consultancy support, the potential for legal advice and fees and also our ability to respond to issues or challenges that might emerge in the individual audits of bodies. We need to plan in budgeting terms to have the capacity and flexibility to respond. We may not always spend in that particular budget heading but without the resources we may be constrained from seeking the best advice as the year rolls on. We're anticipating that there may be more demand for specialist technical advice than there perhaps has been in previous years. Some of the reports do have a degree of contention in them, one could say. It is open to the Auditor General and we have to, as a board, make provision for the Auditor General to get legal advice on the appropriate wording in some of these reports from time to time. That's one of the elements that we've got to consider. Having seen some of the reports, I appreciate why that might be necessary. Can I move you on to clarify something? If we are, or you are, going to be looking at revising the pay award, will that have an impact on what you then do in terms of fees charged? It depends how, where we end up, as Diana said, it will be a negotiation. We will be working very hard to balance what's affordable within our current budget with the expectations and the need to recruit and retain the staff that we need. If we end up in a position where we simply can't reach agreement within the budget that we have here, we will look for further efficiencies internally. That gets more difficult every year. It does for all public bodies, but we will look at that. We'll look at the fee setting for the next audit year, which starts in October 2018. As a last resort, we have the autumn and spring budget revisions to come back to you, but we work very hard to make sure that we never have to do that. We haven't in the past. We'll do our best to make sure that we don't in future. You don't anticipate coming back even before the budget process is over? We have no expectation of that at all at the moment. I think that that's helpful to know so that we have certainty in what we consider. Page 19 notes that a fees agreed with audited bodies may be increased by 10 per cent. I understand that you used to have a provision where you could decrease audit fees by 10 per cent. Did any public body receive those reductions in the past? A very small number did, but it was a very small number. We had feedback when we did our review of fees and funding from a number of finance directors that said that they thought that we should not continue with that as a regular basis. They felt that it was very difficult for them generally to achieve reductions. What we have retained, though, is an annual review process. If the auditor and the audited body believe that fees should be reduced, they will be, but it will be a permanent reduction from the start of the next year. Were those finance directors the ones that enjoyed the reductions or the ones that didn't out of curiosity? Probably the ones that didn't. I'm not surprised at that. You retain a degree of flexibility to make those reductions, although they are not available across the board anymore? They are not available on an individual within-year basis, but between years, yes. That's helpful to know. I turn to health boards, because I see that they will be pleased to see the few reductions of 4.3 per cent as performance costs are going to be met centrally by the Parliament. However, island health boards remain at the same level. Can I ask why that is? I suspect that there's an obvious answer to that, but for the record... For the record, it is that the island health boards had not been paying a contribution to the performance audit costs in recent years. I didn't expect that answer, so it's always good to ask. Can I ask why? Did they just get missed off? It goes back a long time to when Audit Scotland was formed and judgments were made at the time about the relative burdens on islands versus territorial boards, mainland. There is a continuing challenge for us and for small audited bodies that the starting cost of doing an audit isn't very sensitive to the size of the body. Small health boards audit fees proportionally are higher than those for larger boards. I think that that was one of the mechanisms that was used in the past to try and even things out a little bit with the funding that is now provided by the Parliament for performance audit that falls away. Can I turn to page 21 on costing audit work? You very helpfully set out the hourly rates for audit work and I welcome the transparency that you have provided if only other public bodies took a leaf out of your book. Do you take the actual cost of staff and hourly rates to inform future fees? Is that how you work out the schedule of future fees? Not quite. Russell will talk you through it. Not quite, but the hourly rates in here are the full cost of running Audit Scotland divided by the number of hours we expect our staff to work on audit or other direct activities. It is an hourly rate based on that. Those, in effect, are used as a mechanism to compare the actual costs with what we have set as the fees. Over the long term, you are right. It is an iterative process year on year on year. Out of curiosity, could you explain to me how you monitor, I suppose the word is productivity of the audit staff, how you determine what are the chargeable hours, the direct work and the indirect administration? We have a time recording system in which all staff record the activities on which they are or individual audits on which they are spending their time. I look forward to your entry for your last occasion before committee will be interesting reading. Thank you, convener. What is the normal utilisation or chargeable percentage? It varies by grade of staff from around about 135 days for assistant directors, which is the lowest level, up to 200 days for senior auditors, the core audit grades. What's the denominator? Daze. No, sorry, I'm 135 out of how many. It varies depending on different staff with different terms and conditions, but about 220. It's worth saying that we are currently reviewing our time recording codes. At the moment, we have different codes in different parts of the business, which makes making meaningful comparisons more difficult than it ought to be. We'll happily update the commission on that next year. To be sure, the rates that are quoted on page 21 are the charge-out rates? No. Are cost rates equal our charge-out rates because we have no profit? Yes, but if you're not charging people out for the full number of hours, then you're not recovering all your costs. We are because the full costs go in at the top of the calculation. It's the full costs of Audit Scotland that go in at the top, minus the cost of firms, minus one or two other things. You've then got that pool of cost, which is divided by the number of days staff work, so this is a very full-costing rate. If you're dividing it by 220, but then only multiplying it by 200, am I missing something here? You're missing the overhead that has to be spread across all the chargeable hours in inverted commas that staff deliver. So you don't charge them? Forgive me a second. So the charge-out rates here are the total cost of employment? The total cost of the organization. The total cost of Audit Scotland for a trainee is £46 an hour. Are we looking at the same thing? We are looking at the same thing. I think the confusion comes where you start talking about charge-out rates because we're not charging staff out in that way. So these are the hourly rates that are required to recover the costs of Audit Scotland against the hours of audit delivery that are done. It's a different business model to a firm where you're looking to generate more chargeable hours to generate a profit. Is that for people to work effectively? There are many incentives for people to work effectively, but the chargeable hours isn't the most important one of them. Because you get paid for the hours regardless of how hard they work? Because we're not in the incentives that we have and we're not about generating additional work. We're about doing the work to the highest quality that we can as efficiently as we can. Is that set out somewhere else at the same time here? I'm trying to think whether our fees and funding strategy might be the best way of getting at it. I'm thinking more of staff incentives. Diane, do you want to have a go? I think that the piece of work that Caroline referred to, we're currently reviewing how we use our time. There's a project going on that is looking in quite granular detail at all of the time coding, time recording and so on. We're developing enhanced models for the incentives to deliver a quality piece of work and so on. I'll be very happy to share that with you when the work is complete and to give you a briefing at some point on that piece of work and how that looks. I think that the key thing, as the Auditor General has mentioned a couple of times, is that in this public audit model this is quite a different set of incentives and a different starting point from a profit maximisation one. Is there a question assurance that a huge amount of management effort goes into comparing the time that's going into a particular audit and the grade mix, the cost of delivering the audit against the audit fee, benchmarking that across other audits internally and against the cost of the audits that are done by firms? I don't want to give the impression that there are no incentives for efficiency in that way, but the incentives aren't about profit. It's an organisation, I think, of just efficiency of time. As an additional check and balance, we're currently doing a review of the first year of the implementation of the new best value model in local government. Part of that feedback to the Accounts Commission will be not just about the work, the content and the quality but also about the cost of the work that we've done. I've got a few questions myself, but I'd like to invite my fellow members if they've got any other questions they'd like to ask at this point. In that case, obviously Audit Scotland is taking on additional audit functions as a result of the devolved powers. Logically, you would think that if Audit Scotland is taking on part of that audit, that there must be savings to the Scottish Government elsewhere since that audit function will no longer be carried out by another body. Is there any saving there that we can point to? It's difficult to do that across the Scottish Government and the UK Government because of the way in which the most significant of the new financial powers are being delivered. For income tax and for VAT, they will continue to be collected by HMRC as part of their overall collection systems. Our colleagues in the National Audit Office will continue to audit HMRC in terms of their overall management and those two tax accounts. If anything, I think that my counterpart, the Comptroller and Auditor General in Westminster, would argue that there's more work involved for them in the additional assurance that's required around Scottish income tax rather than less. Of course, the Scottish Parliament is looking for its own assurance on Scottish revenues, which are now a very significant part of the Scottish budget. The same is true to a lesser extent for the Department for Work and Pensions, certainly during the transitional period. When we are fully up and running with the new social security agency and the new benefits in place, it may be appropriate to have a look at the degree of interaction with DWP. The expectation is that because the universal credit will continue to be a UK-wide budget benefit, which will interact with many others, that that interface will still be there. We're very happy to keep that under review, and it's one of the commitments that we've made to the Public Audit Committee, as you've been talking about accountability and assurance over the new powers. At the moment, it's not easy to see where there's a reduction elsewhere to compensate for the increase that's required here in Scotland. From what you touched on there, page 7 of your budget proposal, the very top line says that the Scottish Parliament will be responsible for raising the income of £22 billion, because the Scottish Parliament isn't actually responsible for raising it. It's raised by the UK Government and then allocated back, which is why there's an issue about savings on audit. You're right. We're moving from about £4 billion being revenue that forms part of the Scottish budget other than the block grant to £22 billion other than the block grant, about 50 per cent. As you know, the fiscal framework is complex and so are the administration arrangements. The Parliament rightly expects assurance about the way that's working and about the way in which Scotland's interests are being protected as part of that. There will be an equal and equivalent interest, I imagine, in Westminster, about the other side of that equation. It's one of the costs of devolving financial responsibilities, the need to increase the oversight and scrutiny of which we're a small part. I've got one or two small points I'd just like to ask about. You're obviously talking about real-term fee reductions, and you're talking about that happening in 2018-19, and you have a history of fee reductions going back over a number of years now. In the present environment, I realise that the fee collection is really a totally separate calculation, but is there not a danger of perceptions that costs are being transferred to the Scottish Government from the audited units by giving them reduced fees? No. We've worked very hard, as the Commission knows, to increase transparency, first of all, and you'll see within this budget proposal a sectoral breakdown of where the costs and the recovery lie. We follow that through to our financial reporting each year, and we are also very clear about the functions that we ask Parliament to fund primarily because we're not able to charge an audit fee for them. There's no question of that happening at all, and I hope that the increased transparency provides the Commission with that assurance. Looking at page 9, GDP deflaters, you're using a GDP deflater of 1.6 per cent, which is what is officially out there. How are you going to be affected with increased inflation? You can see within the budget proposal the assumptions that we've made about inflation, and we need to keep those under review since things are changing out there. The way that we use deflaters in this proposal is really to give you a real-terms comparison, so looking back at the way that it doesn't make a significant difference. What's more important is the assumptions that we build into future budgets and making sure that they're realistic and as far as we can that they're offset by efficiencies that we're able to make across the business. You've spoken about efficiency savings, and £187,000 is what you're planning, which is 28 per cent of the estimated cost of the new powers. How realistic is that? Where is it coming from? You're well-planned as part of the budget, and I'll ask Diane to talk you through the make-up of them. The efficiencies come from, as I said in response to an earlier question, how we have built up the work that's required for the new financial powers, along with refocusing some of the work that is taking place in central government and associated bodies already through the audit. There's a bit of refocusing going on to deliver efficiencies to contribute to the new financial powers work. We also continue to generate and look for efficiencies in our use of IT to support the audit. I mentioned earlier how we've developed our audit intelligence project that looks at data analytics to equip auditors with easily accessible data and to analyse data more efficiently. Those are the primary make-up of those efficiencies. We also have a separate programme of efficiencies, and the biggest piece of work that we've got going on is the one about how we use our time that we've discussed in response to an earlier answer. We'd be very happy to share the results of that when that works complete. On the IT side, you're talking about enhancement of what you've got in order to achieve savings down the line, so there must be an initial investment in there to achieve that. We've already made an investment in some of the capital requirements and others that we have to deliver data analytics. I mentioned the data analytics staff, the learning and development that we're doing, so there's a range of ways in which we're investing in that capacity. That's a key priority for us. We've taken our digital strategy to the board and had recent discussions about how we deploy auditing in digital activities in the public sector, but also how we build our own digital capacity. That's very much at the forefront of our development strategy. Turning to Appendix 3, page 17.2, we're talking about the audit work done for the different classes of audits and so on. Over the years, we've had quite a bit of discussion on that in the past and sure there's no cross subsidy and so on, and I think a lot of work has been done on that. You've determined that each sector is being a class of audits. Maybe you could remind us a little bit, especially as we've got new members on the board, on how that works in terms of establishing a sector as a class of audit. Under the PFA 2000, Audit Scotland is required to try to broadly break even taking one year with another for either audits or classes of audits. Early on in Audit Scotland's life, the board decided that classes of audit was the way in which they wanted to go forward. We have defined classes of audit as being each sector, so local government is a class, the NHS, central government chargeable audits, further education and Scottish Water sits on its own. Are there any Chinese walls in the organisation? In relation to audit quality, yes, there are. Beyond that note, as Diane said earlier, one of the strengths of our public audit model in Scotland is that we can look across local government, the NHS central government and top to bottom from central government funding right through to where it's spent on the ground and we aim to maximise that rather than to put artificial divisions within it. And the one you mentioned then? Audit quality, yes, the team that we discussed earlier that is doing the quality appraisal work, they are separate from the audit delivery teams. So how does that work? Is this physical files, software, computer files, how do you keep them apart? Those members of staff do not work on any audits, they have their own file areas within software, within the computer systems, they will report to Diane rather than to any of the directors engaged in audit work. Still staying on the same page, item 4, just out of curiosity, this is the first time I've seen this comment made, audit appointments are made by the Auditor General or the Accounts Commission. I thought the Auditor General appointed all auditors. The Accounts Commission makes appointments to all local government bodies, that's its primary function. Who does the selection process? We run a shared procurement exercise, which puts together a procurement strategy, puts together a slate of audited bodies who have successfully tended for the work and then proposes portfolio that make up the individual appointments for me to approve for the bodies in my area and for the Accounts Commission to approve for the bodies in its area. Is this criteria for appointing these auditors the same as Audit Scotland uses elsewhere within the public sector? We run an overall single joined up procurement exercise on behalf of the Accounts Commission and me as Auditor General. So there's no difference in terms of the criteria in choosing the auditor? No. I'm almost there. Just one bit of interest here on page 19, item 18, the best value on housing benefit audit, it's apportioned between the 32 councils on the basis of populations as of June 2015. I was just wondering what the reason behind using that criteria was. Population is a crude measure of complexity of an audit of a council surely. It is not meant to reflect the relative costs of the individual audits. What it reflects is the way in which the bodies who are being charged were funded for it by the Scottish Government when that work started. So when best value audit started, the amount of money distributed to local government to compensate them for the additional cost of both best value work for themselves and audit was just put through the main distribution formula for local authorities. It wasn't divided up on the basis of what the actual costs might be and therefore we have kept that mechanism in place so that the bodies are paying approximately equal to the relative funding that they received from the Scottish Government. Okay, that's just interesting. Do any other members have any questions that they would like to ask at this point? No? In that case, can I thank the witnesses for their evidence and attendance today, especially Russell, who's presumably rushing off now for a well-earned rest? Once again, very good luck in your retirement. Thank you. I now move the meeting into private.